Community Colleges and the Dangers of Student Loan Debt

For high school students who are on the hunt for ways to reduce the cost of a college education, your local community college may look like a way to keep your expenses down and avoid the crush of debt from school loans.

In fact, many financial advisers recommend that, if you’re a cost-conscious student, you complete your first two years at a community college before transferring to a four-year university to receive your degree, as a way of cutting college costs by as much as half and minimizing your need for college loans.

Community colleges almost universally have annual tuition rates well below those of four-year colleges and universities, so at first blush, the two-year route may seem like a natural choice in terms of cost management and college loan debt relief.

As it turns out however, community college students are among those students most likely to struggle with college loan debt and to default on their federal student loans.

According to the most recent data from the U.S. Department of Education, 10.1 percent of community college students who are carrying federal education loans end up defaulting on their loans within the first two years of repayment — more than twice as much as the 4.4 percent of borrowing students at public four-year universities and 3.8 percent of borrowing students at private four-year universities.

Broadening the scope to look at student loan delinquencies in addition to defaults — since late payments, and not just a complete absence of payments, also indicate a struggle with the repayment of debt — the potential for trouble among community college borrowers is even higher: A whopping 60 percent of community college students will either default or become delinquent (without defaulting) on their college loans, according to a new report released by the Institute for Higher Education Policy.

In comparison, among student borrowers at public four-year universities, 34 percent will either fall behind or default on their school loans. At private four-year universities, 28 percent will.

Minimizing, and Managing, Student Debt at Community College

So what do these default and delinquency rates mean for college-bound adults who are looking to find a quick route into the working population or for high school graduates who want to minimize the cost of a four-year college education by transferring credits from a community college?

For many students, attending community college is still an effective method to significantly reduce the total amount spent on a college education, but there are a few hazards to look out for to avoid taking on more student loan debt than you’ll be able to handle later:

1) Keep your non-tuition expenses low.

A full 52 percent of students pursuing an associate’s degree and 37 percent of students in certificate programs don’t take out any school loans at all, according to the College Board.

These students make their community college experience work by managing their living expenses at the same time they’re keeping their college costs low. Most community college students are commuter students, living at home, which cuts back on room-and-board costs.

Managing or reducing your living expenses may mean living at home with your parents, brown-bagging your lunch instead of eating on campus, or working part- or full-time while you go to school.

2) Seek out scholarships and grants.

You can cut your college costs even further by seeking out scholarships and grants, which provide you with financial aid that, unlike a college loan, doesn’t need to be paid back.

If you’re a working student, check with the human resources department at your place of work. Some employers offer tuition reimbursement programs or professional development benefits that can help you defray the cost of higher education.

3) Finish your degree.

For those college students who do need to rely on student loans to get through school, the single best predictor of successful repayment is graduation. Students who complete their degree, above and beyond, are the most likely to repay their school loans without defaulting or becoming delinquent.

Just 15 percent of community college graduates default on their college loans, compared with 27 percent of community college dropouts, according to the Institute for Higher Education Policy. When looking at student borrowers who fall behind on their loan payments without defaulting, 27 percent of community college graduates experience this kind of delinquency, versus 39 percent of community college students who didn’t complete their degree.

Students who spend one year or less in school are the most likely to run into repayment problems on their college debt, often because either they can’t find a job or the job they do find doesn’t pay enough to enable them to make their student loan payments.

4) Borrow only what you need.

Overborrowing can be particularly problematic for community college students because the federal education loan program offers the same maximum loan amount regardless of what type of school you attend.

The maximum undergraduate federal loan is ,500 for first-year students and ,500 for second-year students (,500 and ,500, respectively, if you’re an independent student, no longer financially dependent on your parents).

The maximum federal undergraduate loan, in other words, will, unlike at a four-year college or university, typically cover the cost of all tuition and fees at a community college, leaving a few thousand dollars still available for books, transportation, and living expenses.

That extra money can be tempting. Living expenses can pose a major challenge for many college students, regardless of the type of school you attend. How you pay for your living expenses while in college can mean the difference between manageable and unmanageable debt levels when you graduate.

Having a plan to pay for your living expenses without resorting to maxing out your student loans will significantly reduce the amount of money you need in order to complete your degree. And the less student loan debt you have when you graduate, the lower — and thus more manageable — your monthly payments will be and the faster you’ll be able to pay those loans off.

How Would Tying Student Loans to Repayment Rates Affect Higher Education?

As the U.S. Department of Education considers linking colleges’ and universities’ eligibility for federal student financial aid to the school’s student loan repayment rate, some analysts are looking at just how large the student loan default problem is and what might happen if new student loan repayment rules take effect in 2012 as expected.

Defaults on student loans can be measured in a number of ways, but one of the most common measures of default is the official cohort default rate, defined by the Department of Education as the percentage of a school’s student loan borrowers who enter repayment on certain federal education loans “during a particular federal fiscal year, Oct. 1 to Sept. 30, and default or meet other specified conditions prior to the end of the next fiscal year.”

In other words, the cohort default rate is the percentage of borrowers who enter repayment on their federal student loans and then either stop making payments on their student loan debt or never make payments at all during the 12–24 months after entering repayment.

Student Loan Default Rates vs. Repayment Rates

Government analysts now want to look more closely not at schools’ default rates on federal college loans but at schools’ repayment rates on those loans.

Consumer and student advocates have long argued that the cohort default rate, as currently measured, severely underrepresents the proportion of a schools’ students who are struggling with college loan debt by looking at only an initial 24-month period. The two-year snapshot, these critics maintain, misses a large swath of students who are able to muddle through making their payments for the first couple years but then begin defaulting in the third and fourth years of their repayment periods in accelerated numbers.

The default rate also fails to take into account those students who aren’t able to make payments on their student loans but who aren’t considered to be technically in default because they’ve arranged for a student loan debt management plan that permits them to put off making payments on their federal college loans.

In proposed rules that would regulate a school’s eligibility for federal student aid, the Department of Education would consider a school’s student loan repayment rate and not simply its default rate, as current regulations do.

By expanding its institutional financial aid eligibility rules to include student loan repayment rates, the Education Department would be looking at how many students simply aren’t repaying their student loans — not only counting borrowers who have defaulted, but including those borrowers who are in a legitimate deferred repayment plan or approved forbearance period that allows them to temporarily forgo making their federal student loan payments.

The Student Loan Debt Problem, as Measured by Repayment Rates

Earlier this year, the Department of Education reported that the national cohort default rate was 7 percent for the 2008 fiscal year, the last year for which repayment data are available.

Looking at repayment rates, on the other hand, while also expanding the time span over which student loan repayment is measured, yields a far larger non-payment rate among student loan borrowers and paints a truer picture of the size of the inability-to-repay problem among student loan borrowers.

The Department of Education estimates that in 2009, among alumni of public universities who carried federal student loan debt, only 54 percent of those who had graduated or left school within the last four years were in repayment on their federal student loans — a far cry from the 93-percent national non-default rate of 2008.

The four-year repayment rate was marginally higher for students at private nonprofit universities, at 56 percent. Perhaps predictably, the repayment rate among alumni of private for profit colleges was substantially lower — just 36 percent over four years.

These figures come from a new repayment database that the Department of Education will use to track government-issued student loans, from the time they’re issued until the time they’re paid off. The database can also track what happens in between.

By looking more carefully at each loan’s entire lifespan, the Education Department hopes the database will help identify the point at which borrowers first begin to show signs of trouble repaying their federal college loans.

Schools’ Student Loan Problems Could Mean Loss of All Financial Aid

As the government’s proposed financial aid rules are currently worded, the new rules would allow the Department of Education to impose financial aid restrictions on schools whose overall student loan repayment rate falls below 45 percent.

Schools that have a repayment rate of lower than 35 percent would face the loss of federal student aid altogether.

Using the Education Department’s 2009 data, more than half of the higher education institutions in the United States would face some type of federal student loan sanctions if the proposed financial aid rules were in effect today, and 36 percent of post-secondary institutions would be barred from offering federal student aid for a period of at least two years.

However, the proposed new Department of Education rules will also allow schools to report student loan repayment rates separately by program. By segmenting out repayment rates by program, institutions could avoid school-wide federal financial aid sanctions, leaving intact federal student aid for academic programs whose repayment rates are within the established guidelines, while still receiving sanctions for programs whose graduates consistently fail to make payments on their federal college loans.

Guaranteed Money With These 8 Types of Student Loans

Holy Cow, I had no idea there were so many different types of student loans available to the high school graduate. This guide will reveal the 8 different types of student loans you can chose from, as well as the positives/negatives of each and the little secrets we found out that will help you decide which types of student loans are right for your situation.

The 8 Types of Student Loans:
 
*Federal Stafford Loan (2 types: subsidized-unsubsidized)
*Federal PLUS Loan (Parent Loan for Undergraduate Students)
*Federal Perkins Loans
*Bank Loans
*State Loans
*Additional Unsubsidized Stafford Loan
*Other types of loans
  military
  work place
  college
** College Board Extra Credit Loan

Before you run out and start looking for different types of student loans understand that you are not eligible for any student loans until you have first completed and submitted your application to FAFSA.  Once they send you your Student Aid Report (SAR) then you can start looking for the best student loans available for you and your child.  Let’s dig into the different types of student loans.

* Federal Stafford Loan – Subsidized:  the most popular and cost effective student loans available.  These are government guaranteed loans for both undergraduate and  graduate students.  It’s really hard to beat these interest rates.

***Student Loans Secrets***

The College Cost Reduction and Access Act of 2007 determined the following fixed interest rates on Stafford loans.  These rates are for subsidized loans to undergraduate students.

6.0% for the 2008-09 school year
5.6% for the 2009-10 school year
4.5% for the 2010-11 school year
3.4% for the 2011-12 school year
returns back to 6.8% for the 2012-13 school year.

My wife was eligible for this loan, however it was not enough to cover expenses so she had to pursue additional sources.  My son was not eligible for a subsidized loan, hterefore he had to get an unsubsidized loan.  And, we will have to reapply with FAFSA in January for both of them.

* Federal Stafford Loan - Unsubsidized: this can be a long term low interest rate loan. Right now the rate is 6.8%.  Those students who don’t qualify for the subsidized loan almost always can get this loan.  In some cases you can postpone interest payments, but usually the interest on the loan is the borrower’s responsibility.  We have chosen to make the payments monthly (.92) to keep the overall cost of the loan at a minimum.

Unsubsidized Stafford Loan - This loan is long-term, non-need-based, with a low-interest rate. This type of student loans is best for students who don’t qualify for other types of financial aid, or who still need more money in addition to other forms of financial aid. Almost all household incomes qualify, and “unsubsidized” means that the student must begin making payments after the grace period.  There are several cases where students have negotiated the removal of interest payments until after graduation.epaying until after grace period.

***Student Loans Secrets***

Talk to your lending institution and ask for a monthly withdrawal on these interest payments.  We set this up with our son’s account and we are paying his interest payments only and he is responsible for the principal. Our monthly interest payments of a month not only cover the interest but the remainder is applied towards the principal.  As you will find out, if your loan is for 00 by the end of college that loan is probably in the neighborhood of 00 or more.  Add these loans up over several years and it becomes a large chunk of money to have to pay back.

* Federal PLUS Loan – for parents of undergraduates
Basically the parent may take out a loan for their students college expenses.  You can borrow the total cost of their education, get low interest rates and a decent tax break.  Unique with this loan is the ability to overcome poor credit history.  Basically this type of student loan has no ceiling on income levels or how many assets you have. 

***Student Loans Secrets***

You can negotiate the repayment schedule by either starting your payments after the 60-90 days you received the money or after your child graduates.

*Federal Perkins Loans -  normally these loans are awarded to students who have financial difficulties.  The funds available are limited but they are low interest loans. Interest does not start to accrue until 9 months after you graduate or you drop below half time status.  It is best to seek advice of your college financial aid adviser who can direct you in the right direction.

***Student Loans Secrets***

Federal Perkins Loans are reported to your credit bureau, which means it could damage your credit rating if you are late on payments or default on your loan.  Know what you are getting into and if you are a student, start thinking about the future and don’t live in the present.  This is serious stuff.  Do it right and you have an instant EXCELLENT credit rating.

*Bank Loans - the only reason you would pursue this route is if you are turned down by the federal government.  These loans are usually a little higher in interest rates and each bank has different criteria you must fit meet.  It’s best to shop around your local area to see what is available before you hit the internet. Some banks do offer Stafford Loans, but they are more strict on their policies.

***Student Loans Secrets***

They might limit their loans to full time students, repayment options are probably gonna be more limited, and they might offer some incentives on repayments. The most common is an interest rate reduction if you use automatic withdrawal.  Here is what we learned from one institutional Bank:

U.S. Bank supplemental loans…

Their student loans are credit based and they just want to make sure your loan is not covered by another type of financial aid.  The power of your cosigner and your credit history will help you qualify more easily for a loan and reduced interest rates.  They offer deferment which means you don’t have to make payments on the loan or interest rates.  There are no application fees and you can easily learn within 15 minutes or so after submitting your online application if you qualify or not.

*State Student Loans – most states offer a guaranteed student loan.  These funds are administered by a bank which means you will need to apply for the loans through a bank.

***Student Loans Secrets***

These loans are usually more expensive to borrow from than your federal student loans.

*Additional Unsubsidized Stafford Loan – These types of student loans are determined by the federal guidelines and are reserved for borrowers who fall into the “independent category.

*Other types of loans – as a dependent you may qualify for student loans if your parents work place offers them.  The military is another good source for student loans, especially if they are currently serving. However, it is not limited to currently serving, if your parent ever served in the armed forces you should explore these opportunities.  Other places to explore are colleges and larger corporations or businesses.  Talk to your financial aid rep’s at college, they have a lot of underground tactics they don’t normally share with the public but will share with you.

* College Board Extra Credit Loan – AMS or Academic Management Services is affiliated with around 2000 various universities.  They will pay your tuition fees but the catch is you have to repay those fees within a year or less.  These can be expensive and it is usually explored in dire emergencies.

You just read the top 8 types of student loans. Each has it’s benefits and each has some drawbacks.  The last Student Loan Secret we will leave you with has not really been discussed above and it might be the best thing you’ll need to remember.

Start shopping for interest rates, loan fees and repayment schedules.  Interest rate shopping in useless if you are after a government loan, because they are fixed, however private lenders are the ones to be very careful of before you sign on the dotted line.  Private lenders do have discounts so make sure and ask them point blank what they are.

There will be a time when you will need to consider consolidating your student loans.  Until then, try hard to pay as much out of pocket money as you can afford to reduce your debt burden once you graduate from college.  Right now focus on which types of student loans best fits you and your family.

GAO Report: Federal Website for Private Student Loans May Be Unneeded

A report issued on September 29 by the Government Accountability Office has concluded that a Congressionally ordered federal Web-based tool to help college students compare terms and lenders for federal and private student loans may be a significant challenge to implement and could be entirely unnecessary.

The 36-page GAO report says the tool, which is mandated by the Higher Education Opportunity Act (HEOA) of 2008, is no longer needed for federal student loan comparisons because all federal college loans are now issued directly by the Department of Education through the Federal Direct Loan program.

Student loan legislation contained within the Obama administration’s health care reform package that passed through Congress in March eliminated the third-party federal student loan program that had previously allowed private lenders to issue federal education loans on behalf of the government. With no private lenders originating federal student loans, there are no longer multiple lenders or multiple borrower incentives (like rate and fee discounts) for students to compare.

As for comparisons of non-federal private student loans, the GAO notes that prospective borrowers who seek private student loans may already have sufficient information readily available to them, both through their schools’ financial aid offices and through individual lenders’ websites.

Private Student Loans Take Back Seat to Federal Student Loans

Providing a private student loan search and comparison tool may also conflict with the Department of Education’s longtime financial aid message, as well as its re-aligned mission of being the primary provider of federal student loans.

The Department of Education has made a practice of encouraging families to take advantage of all available federal financial aid — grants, work-study, and low-cost government parent and student loans — before turning to costlier private student loans. Placing a tool for finding and comparing private student loans on the Education Department’s website, the GAO points out, could lead some students or parents to mistakenly believe that the department is endorsing the use of private student loans alongside federal financial aid, even before a student’s federally guaranteed financial aid dollars are exhausted.

Furthermore, as the Education Department’s “federal financial aid first” message has gained traction and as fewer recession-stung borrowers have been able to qualify for credit-based private student loans, the use of private student loans has declined, further diminishing, the GAO argues, the need for the private loan comparison site.

According to GAO figures, private student loan lending decreased to about  billion in 2008–09, a drop of 50 percent from the volume of private student loans originated in 2007–08.

Online Comparison of Private Student Loans Faces Roadblocks in Practicality

Providing useful data on private student loans would require the Department of Education to secure the cooperation of a large number of banks and private lenders. Each lender has its own lending guidelines for its private education loan program, and almost all lenders regard their underwriting criteria as proprietary information.

A lender’s underwriting guidelines determine not only what kind of income and credit profile is required to qualify for the lender’s private student loan program, but what rates and fees an eligible borrower will qualify for: Borrowers with weaker credit will generally pay higher rates and fees than borrowers with very good credit.

Without having access to lenders’ closely guarded underwriting guidelines, the Department of Education would likely not be able to create a loan tool that would supply the intended proper guidance to prospective borrowers to help them determine which private student loans would be available to them or which private student loan programs would offer them the best rates.

Additionally, since the HEOA-mandated student loan tool requires the Department of Education to provide real-time information on student loan interest rates, availability, repayment options, and lending oversight, the department would need to expend significant resources to continually verify and update the accuracy of its private education lender data in order to avoid the appearance of bias against or endorsement of any particular lender.

This need for resources points to another significant challenge identified by the GAO: minimizing the cost of the student loan tool to the federal government. The tool would, in the GAO’s assessment, “require a considerable investment.” The Department of Education has already determined that such a tool should not be developed or funded by private student loan lenders, but the department itself is unwilling to guarantee that it can provide a stable funding source to meet the HEOA mandate.

Website Comparing Private Student Loans Would Be Redundant

As of February, under another provision of the HEOA, lenders that offer private student loans must provide borrowers with additional disclosures regarding the overall cost of a private student loan and the student’s eligibility for federal financial aid. The GAO maintains that these new required disclosures further reduce the need for the mandated student loan tool.

While GAO research indicates that students may find a government-sponsored student loan comparison site to be more factual and neutral than one run by lenders, several lenders and higher education associations questioned whether the federal comparison tool would simply duplicate existing resources and information already made available online by various student loan lenders and consumer advocacy groups.

Moreover, education officials note, most students turn primarily to their school to obtain information about financial aid and college loans. By supporting the ability of colleges and universities to provide accurate student loan information, the Department of Education may better be able to reach the target population than by creating its own student loan comparison website.

Modification of the student loan tool mandate, however, would require Congressional approval. To date, members of Congress have not indicated they are willing to alter the terms of the HEOA.

Student Loan Corp. Has Risen To An 8-Month High
Student Loan Corp. (STU) gapped open higher Monday, but moved in a range in early trade. The stock has broken out higher in the last 15 minutes and is now up 2.25 at $ 32.25.
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Student Loans, Financial Aid Both Rise in 2009?10

The College Board, in its annual “Trends in Student Aid” report, estimates that a total of 4.5 billion in student financial aid was distributed in 2009–10. Grants now comprise about 50 percent of student financial aid from all sources, both federal and private sector.

In 2009–10, the average undergraduate student financial aid package was worth nearly ,500. This figure includes more than ,000 in grants and more than ,800 in government-backed federal student loans. Graduate students received slightly more financial assistance, on average, in the form of grants — nearly ,400 — but also borrowed more heavily. The average graduate student took out more than ,700 in graduate student loans.

Grants

Compared to student financial aid figures for 2008–09, grant aid to undergraduate students increased by 22 percent, while federal student loans increased by 9 percent. The 2009–10 academic year also saw a 16-percent increase in the average federal Pell Grant award to ,656, the largest one-year rise in the program’s history. Only about one-fourth of all Pell Grant recipients, however, qualified for the maximum grant amount of ,350.

Student Loans

Private student loans — college loans issued by private lenders rather than by the federal government — represented about 8 percent of all student loans in 2009–10, a decrease from 25 percent in 2006–07.

Federal subsidized Stafford student loans made up about 35 percent of all student loans in 2009–10, an increase from 31 percent in 2006–07. Unsubsidized federal Stafford student loans accounted for 42 percent of the combined federal and private student loans taken out in 2009–10, an increase of about 12 percent from 2006–07.

Subsidized Stafford loans, which are available only to students who demonstrate financial need, are government-backed college loans on which the government will pay the interest while the student is in school or in a period of approved deferred payments. Unsubsidized Stafford loans are available to students regardless of financial need. Although students, as on a subsidized loan, may defer payments on a federal unsubsidized college loan while they’re in school or in certain other authorized circumstances, the student, not the government, will be responsible for paying all the interest that accrues on an unsubsidized loan during those periods of deferment.

According to the College Board, about 65 percent of all undergraduate students in 2009–10 did not accept Stafford loans of any type. The majority of students who did accept Stafford college loans ended up taking out both subsidized and unsubsidized student loans. The average Stafford student loan debt load in 2009–10 was ,550.

In 2008, Congress authorized increases in the maximum annual and lifetime federal lending limits for Stafford student loans. The expanded loan amounts were approved in part to discourage students from taking on the burden of private student loans, which tend to carry higher interest rates and fewer borrower protections than federal student loans.

Currently, dependent undergraduate students can borrow up to a maximum of ,000 in Stafford college loans throughout their undergraduate college career. Independent undergraduates, as well as dependent undergraduates whose parents do not qualify for a federal parent loan, can borrow up to a maximum of ,500 in Stafford college loans.

Graduate students may also be awarded both subsidized and unsubsidized Stafford student loans, up to ,500 a year and up to a total lifetime maximum of 8,500, including both their undergraduate and graduate Stafford loans.

Graduate students may obtain additional student loan funds through the federal Grad PLUS graduate student loan program. However, whereas Stafford student loans don’t require either a credit check or a co-signer, Grad PLUS loans have modest credit requirements. Even so, the number of graduate loans issued through the Grad PLUS program has steadily increased since Congress introduced the program in 2006–07. About 5 percent of all student loans issued in 2009–10 were Grad PLUS graduate student loans.

Parent Loans

In contrast to federal student loans, federal parent loans, known as PLUS loans, are being used less frequently, with 20 percent fewer parent loans issued through the PLUS program in both 2008–09 and 2009–10 than in previous years. The volume of federal parent loans peaked at 11 percent in 2004–05 and 2005–06.

Since PLUS loans, unlike Stafford loans, are credit-based loans, one reason for the decline in PLUS loan volume may be that the number of parents who qualify for a PLUS loan has dropped due to the recession. Under current PLUS loan guidelines, parents who are more than 90 days past due on at least one bill or who have declared personal bankruptcy or been subject to a foreclosure proceeding within the last five years do not qualify for parent loans through the PLUS program.

Read the full report from the College Board: “Trends in Student Financial Aid 2010“